- GBP/USD closed below 1.2900 for the week, with large weekly losses.
- Powell’s comments emphasize the Fed’s policy imbalance with Bailey.
- As long as the technical setup favors the bears, the downside slope remains intact.
The GBP/USD weekly forecast remains strongly bearish as the pair saw a big dip towards the 1.2800 area while the Fed-BoE divergence remains in play.
Last week’s rally looks like a deviation from the ongoing downtrend after the GBP/USD pair bounced back after a week of declines. The second half of the week saw sterling bulls attempt to reclaim 1.3100, but dollar demand remained high. Next week, the US will release major economic reports while the UK will remain calm.
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Sellers dominating the market
As yields surged amid hawkish Fed comments, the US dollar dominated a quiet start to the week. US inflation rose to a four-year high of 8.5% in March, so markets are pricing in a 70% chance of double Fed rate hikes in May and June. However, investors remain on their toes in the absence of progress on the Russian-Ukrainian diplomatic front, and the dollar is seen as a safe haven.
The same hawkish Fed narrative characterized Monday’s trading spread to Tuesday, causing sluggish trading to exaggerate bearish bets. As the Fed’s dovish outlook continued to support dollar demand and yields, the pair closed Tuesday at 1.2973 from last week’s low. James Bullard of the Louis Fed called for 75 basis points if necessary. Treasury yields have risen towards the crucial 3% level due to his comments. Fed-led sentiment continued to weigh on the cable in the absence of significant economic news from either side of the Atlantic.
After a sharp correction in the US dollar on Wednesday, the major currency peaked at 1.3070 after breaking a four-day downtrend. Yields followed a fast recovery in USD/JPY from two-year highs. The US dollar also took a hit as the euro strengthened following comments made by ECB policymaker Martins Kazaks, who said a rate hike could happen as soon as July. Several policymakers expressed hawkish views on the ECB’s monetary policy on Thursday.
Sterling’s bullish party, however, ended after the dollar staged a V-shaped rebound following the Fed’s Jerome Powell’s comments at the IMF conference. Powell approved a 25-basis point rate hike in May and a 50-basis point hike in the interim. Cable saw offers just below 1.3100 and fell to 1.3000. Andrew Bailey, governor of the Bank of England, spoke at an event on Thursday and expressed concern about the UK’s economic slowdown.
Downbeat UK retail sales
A disappointing retail sales report in the UK and Friday’s S&P Global Services PMI exacerbated the Bank of England’s difficulties. It pushed the pound below 1.29 against the dollar for the first time since November 2020. Retail Sales declined -1.4% m/m in March, compared to expectations of -0.3% and -0.5%. In the meantime, the preliminary index of business activity in the UK services sector declined to 58.3 in April from 62.6 in March.
On Friday, S&P global composite PMI data showed that private sector business activity grew slower in April, falling to 55.5 from analysts’ expectations of 58.1. The dollar, however, remained strong and prevented the GBP/USD from recovering substantially. Last but not least, Bank of England Governor Bailey reiterated that UK inflation is expected to increase due to higher energy prices.
GBP/USD weekly events forecast
As far as high-level UK economic reports are concerned, the first half of the week is quiet. Therefore, GBP/USD will follow the US dollar’s price action, driven by bond market sentiment.
Tuesday’s US durable goods orders and consumer confidence index aren’t likely to impact market perceptions of the Fed’s tightening plans.
The PCE core price index, the Fed’s favorite measure of inflation, will be released on Friday. However, Fed policymakers won’t be speaking since the central bank entered a “shutdown period” before the May 4th decision. As a result, there is a divergence between the Fed and the Bank of England policies, and the yields continue to rise.
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GBP/USD weekly technical forecast: Bears eyeing further downside
The daily chart shows a strong bearish outlook. The huge down bar with a high volume breaking below the key support of 1.2970 indicates further losses on the cards. However, after such a sharp dip, we may expect a minor upside correction up to 1.2900 to 1.2950 next week. Any recovery attempt will be considered a selling opportunity.
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